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bija089 [108]
3 years ago
6

"Stock in Daenerys Industries has a beta of 0.73. The market risk premium is 10 percent, and T-bills are currently yielding 5 pe

rcent. The company's most recent dividend was $1.6 per share, and dividends are expected to grow at a 5.5 percent annual rate indefinitely. If the stock sells for $35 per share, what is your best estimate of the company's cost of equity? Use the average from CAPM and Dividend Growth Model calculations."
Business
1 answer:
ololo11 [35]3 years ago
8 0

Answer:

CAPM = 12.30%

Dividend Growth Model=  10.32%

Explanation:

According to the capital asset price model: Expected rate of return = risk free + beta x (market premium)

5% + (0.73 x 10%) = 12.30%

according to the constant dividend growth model

price = d1 / (r - g)

d1 = next dividend to be paid

r = cost of equity

g = growth rate

$35 = $1.6 x (1.055) / (r - 0.055)

r = 1.688 / 35 + 0.055 = 0.1032 = 10.32%

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3 years ago
Lamey Co. has an unlevered cost of capital of 10.9 percent, a tax rate of 35 percent, and expected earnings before interest and
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Answer:

cost of equity is 11.60 %

Explanation:

Given data

cost of capital = 10.9 percent

tax rate = 35 percent

earnings = $21,800

bonds outstanding = $25,000

rate = 6 %

to find out

cost of equity

solution

we will find first value of unlevered

value of  unlevered  = earning ( 1 - tax rate ) / cost of capital

value of  unlevered  = 21800 ( 1 - 0.35 ) / 0.109 = $130000

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cost of equity will be = cost of capital + ( cost of capital - rate) (bonds / equity ) ( 1 - tax rate )

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